The misinformation on both sides of the so-called Buffett Rule debate has reached epic proportions.

Associated Press

The left says the rule is needed for revenue and fairness, though the rule on its own does little for either.

The right says the rule will hurt job creators – despite overwhelming evidence that the wealthy have plenty of cash already and are choosing to hoard it or invest in gold, overseas stocks and other things that don’t create jobs. We already have historically low rates for the rich and they’re not creating jobs.

Still, there is a broader problem with the Buffet Rule: It would arguably be the most unreliable tax on the planet. That’s because it targets the most unstable income source of the most unstable income group in America.

Essentially, the Buffett Rule is a tax on the capital gains and dividends of the highest earners. As we learned over the past four years, capital gains and dividend income is subject to wild market fluctuations. Those fluctuations, in turn, cause the incomes of the highest earners (who are the biggest capital gains earners) to also swing wildly.

Consider the data. The population of Buffett Rule targets – or Americans earning $1 million or more – declined by 40% between 2007 and 2009, the latest period for which IRS stats are available. No other income group in the IRS charts showed such a rapid fall.

What’s more, declines in tax revenues during the recession in states like New York, New Jersey, Massachusetts and California fell precipitously. In California, those collections fell by more $9 billion between 2007 and 2009, while in Massachusetts, cap gains tax collections declined by 75%.

In sum, capital gains are highly volatile, and so are the incomes of the million-plus earners, which depend on market gains and stock dividends for income.

This is not to argue that the tax is good or bad. And some years, when markets are booming, the tax could earn more than projections.

But with the number of eligible payers swinging more than 40% in two years – and the salaries themselves swinging even more – the Buffett Rule could feasibly earn dramatically less than it’s projected $5 billion a year.

Politicians around the world face a problem when it comes to the overseas rich. They want the spending, taxes and investment that comes with the foreign wealthy. But politicians don’t want to appear to voters as favoring the foreign have-mores over the local middle class.

Bloomberg News

Singapore

These tensions have played out in the U.K., Switzerland, and even Monaco. Now, they’re bursting out into the open in Singapore.

According to news reports, Singapore is ending a program that allowed wealthy foreigners to “fast track” their permanent residency if they kept at least S$10 million in assets in the country for five years. The moves are aimed at slowing the rapid surge in property prices, which have been driven in part by wealthy investors and which have rankled Singaporeans.

A bungalow in Singapore’s Sentosa Cove recently sold for a whopping $39 million.

Singapore still allows wealthy people to get permanent residency. But rather than simply keeping money in the country, they have to invest S$2.5 million in a new company or business. And these rules may also tighten soon.

Foreigners and permanent residents now make up a third of the population. And Singapore now leads the world in “millionaire density”: 15.5% of all its households are millionaire-households.

The question is whether the government’s actions will work. With so many wealthy Chinese, Indonesians, Russians, Middle Easterners and Europeans looking to offshore their money into safe, stable havens, the rich may continue pouring money into the Singapore regardless.

Do you think countries should offer special visas and residencies for the rich?

Economist Marc Faber is often gloomy and almost always contrarian. Yet his latest prediction on the world’s wealthy may be among his most frightening yet.

Bloomberg News

Marc faber in 2009

In an interview on CNBC and in his latest “Gloom, Boom & Doom Report,” Faber says that the diverging fortunes of the rich and the rest has become unsustainable. He says that while asset inflation and Fed stimulus of the past 30 years has benefited a lucky few – basically “those with assets” – continued money printing could lead to sudden and violent wealth destruction.

“Somewhere down the line we will have a massive wealth destruction that usually happens either through very high inflation or through social unrest or through war or a credit market collapse,” he told CNBC. “Maybe all of it will happen, but at different times.”

When asked on CNBC how much money the wealthy could lose in such a scenario, Faber didn’t hesitate: “People may lose up to 50 percent of their total wealth. They will still be well-do-to. Instead of having a billion dollars they will have five hundred million.”

Faber admits he doesn’t know the exact timing of all of this. And he writes that assets and inequality will likely rise before falling. Yet he says that for the wealthy, safety will likely continue to be primary goal when it comes to investing.

“Questions about which assets will decline less than others will become more important and replace the current search for asets that are likely to appreciate the most,” he writes.

He recommends farmland, entire islands, real-estate in New Zealand, Canada and Australia, foreign stocks, precious metals held in custody outside the U.S. diamonds, stamps art and defense stocks.

He says the wealthy should support policies that would reduce inequality. Yet he says that’s unlikely, since “people of privilege tend to prefer to risk their own destruction than surrender any of their advantages.”

Do you think Faber prediction of a 50% wealth loss by the rich could come true?

Millionaires don’t get to be millionaires by playing games on their phones right?

Bloomberg News

Wrong. According a new study from the Luxury Institute, 73% affluent smartphone users (with an average net worth of $2.8 million) used smartphone apps every day. The most frequently downloaded apps for millionaires included Angry Birds, Facebook and Words with Friends.

Of luxury consumers with smartphones, 28% of them own an iPhone, 22% own an Android, 16% own a BlackBerry and 2% own another smartphone, the study said.

The wealthy also buy a lot of stuff on their phones, with an average purchase price of $628, according to the study.

Yet the Luxury Institute said the luxury world needs to understand the true marketing power of Angry Birds and Words with Friends. While they may look like primitive and frivolous time-waster apps, they’re actually “prime spots for luxury mobile marketing.”

The Institute doesn’t offer any specific guidance. But consider the possible synergies. The Millionaire’s version of Angry Birds could feature chickens launching in G550s, soaring headlong into the Italianate mansions protecting the pigs.

Or, instead of bombs, the birds could get giant bags of cash that they could drop on sponsored retailers like Bergdorf, Tiffany’s and Louis Vuitton.

There was Jack Whittaker, the West Virginian who won $315 million in 2002. He was robbed at a strip club, and his granddaughter died under strange circumstances. By 2007, he said his bank accounts were largely empty. He told reporters “I wished I’d torn that ticket up.”

Or Evelyn Baseshore of New Jersey who won two payouts totaling more than $5 million in the mid-1980s and was besieged by thieves and hangers on. “Everybody wanted my money,” said the former convenience-store manager. “Everybody had their hand out.”

Yet the story of the miserable lottery winner may be more myth than reality.

According to several academic studies, a majority of lottery winners turn out just fine. And some wind up happier, healthier and wealthier.

Consider:

A 2006 study in the Journal of Health Economics of lottery winners in Britain found that the winners “go on eventually to exhibit significantly better psychological health.” It also found that improvements in their mental well-being vastly improved.

A highly publicized study of Florida lottery winners found that about 1% of the winners went bankrupt in any given year. That’s about twice the average rate for the population. But the study only looked at those winning less than $150,000. And those in the study who won six-figure sums were far less likely to go bankrupt.

A study in Britain found that 44%of the earnings earnings of lottery winners were spent after five years, yet only a few blew their winnings in their lifetime. Again this depends largely on the amount won.

A study by University of California researchers found that the overall happiness levels of lottery winners spiked up when they won, but settled back down to pre-winning levels after a few months. So if people were generally happy before they won, they would return to natural level of happiness.

The take-away is that sudden wealth only exaggerates your current situation. If you’re unhappy, bad with money and surrounded by people you don’t trust, money will make those problems worse. If you’re fulfilled, careful with money and enjoy a life of strong relationships, the lottery could make those strengths better.

Of course, we all think that we would handle wealth even better than everyone else. But the entertaining media stories of failed lottery winners don’t seem to reflect the more banal reality: most lottery winners turn out OK.

You started a private company, or took over the family business, and grew it larger one brick at a time. Wealthy families lived off the profits, which also grew incrementally. Wealth creation – and wealth destruction – was a gradual, multi-generational process.

Suddenly, around the mid-1980s, personal fortunes became more sudden and much larger. Exploding financial markets allowed for IPOs, stock-based pay and rapid stock-fueled business expansions. Globalization and technology fueled the boom. The result was that a Bill Gates or Mark Zuckerberg could become among the richest men in the world in just a matter of years. (John Rockefeller didn’t hit billionaire status until his 50s).

Now, a British entrepreneur says the U.S. and U.K. need to return to the age of incremental wealth. Too many kids, he said, are seduced by the “fast-buck” fortunes of tech tycoons like Gates, Zuckerberg and Steve Jobs.

Alan Sugar, the British billionaire, entrepreneur and peer (that’s “Baron Sugar” to you), told the Scottish Sun that “Too many youngsters are waiting for the opportunity to become one of them. They don’t realize that it’s a trillion-to-one chance.”

He added that: “What’s been lost in this country is the culture of starting off with £100, buying some bags, printing on them, selling them — and coming back at the end of the day with a useful profit. You do that five times and come back at the end of the week with £1,000. That’s what we’ve lost, that’s what we need to get back.”

Sugar is the Donald Trump of Britain’s “The Apprentice” TV show, and he said this year’s show will go back to basics when it comes to wealth creation.

Of course, Zuckerberg, Gates and Jobs have created massively popular products and changed industries.

Still, Sugar’s point is worth repeating at a time when the glamor and ease of quick internet fortunes seems far more attractive to today’s debt-laden college grads than making a dollar at a time selling printed bags.

If you think real-estate in Manhattan or San Francisco is expensive, consider Monaco.

The price of real-estate in Monaco — the world’s most expensive locale — is now an average of $5,408 a square foot, according to a report from Citi Private Bank and Knight Frank, the London real-estate firm. Spending $1 million will get you a 200 square-foot closet – presumably without a water view.

The second most expensive locale is Cap Ferrat in the south of France, at more than $4,800 a square foot. That’s followed by London, at $4,534 a square foot, and then by Hong Kong, at $4,406 a square foot.

New York is a relative bargain, coming in at number 17, at more than $2,161 a square foot (this seems to be a little high, even for Manhattan). The only other U.S. locations on the top 50 are Aspen, at number 39, with $974 a square foot, followed by Telluride ($760 a square foot) and Miami, at about $580 a square foot.

Here is the list of the Top 10

LOCATION AVG PRICE PSF

Monaco – $5,408

Cap Ferrat — $4,800

London — $4,534

Hong Kong (houses) — $4,406

Courcheval 1850 — $4,081

St. Moritz — $3,951

Gstaad — $3,701

St. Tropez — $3,600

Geneva – $2,959

Hong Kong (apartments) — $2,625

EDITOR’S NOTE: An earlier version of the chart contained incorrect dollar conversions.

Still, a new study from Phoenix Marketing International shows that many millionaires are pulling money out of their financial investments. The study shows that the percentage of millionaire investors who plan to pull money out over the next 3 months stands is at 12%, a multi-year high. For most of last year, only 7% of millionaire investors were planning decreases in their investments.

Meanwhile, the number of millionaires planning to add to their investments has fallen to 47% from 54%.

Granted, the number of investors adding to their investments outnumbers those who are withdrawing. Yet the trend is to take money off the table. And it stands in stark contrast to the millionaire’s financial outlook. According to the study, 53% of millionaire investors are optimistic about the U.S. economy over the next three months. That’s up significantly from 34% in December.

The number of pessimistic millionaire has fallen to 40% from 61%.

David Thompson of Phoenix said millionaire investors tend to react more quickly to markets, and some are worried about a market top.

“While the current run-up in the equities markets, coupled with good news on unemployment and progress in the European debt crisis, had fueled their impressive turnaround in confidence in the U.S. economy,” he said, “wealthy investors were likely getting advised to exercise some caution regarding putting more money to work in the equities markets (under the premise that they may have reached their peak).”

Why do you think more millionaire investors are taking money off the table?

Mike Shouhed, left, and Golnesa “GG” Gharachedagi are shown in a scene from the new series, “Shahs of Sunset.”

The reality show, which features the Chihuahua-toting, sequin-covered, mansion-dwelling excesses of an Iranian clan in LA, wracked up 1.5 million viewers on Sunday – up by more than a third from the previous week.

The show has its critics, of course. Writing in the Jewish Journal, USC’s Gina Nahai wrote that the show “consists entirely of every negative stereotype floating around this city about the community. All the women here are vain, stupid and spoiled; all the men are vain, stupid and spoiled. To see these characters, one would never imagine that an Iranian could engage in any profession other than selling real estate, or speak about anything other than looks, money and sex.”

All of which has added up to a huge hit. In fact, “Shahs of Sunset” may have stumbled onto a new formula for the reality TV: wealth + ethnic stereotype = hit.

On TV and in real life, wealth is no longer quite as special or exotic. Yet pairing wealth with an immigrant group offers the promise of both voyeurism and cultural tourism, giving viewers a peak into a culture that’s both financially and ethnically alien to the rest of America.

Here’s one sample line from the character MJ: “I love flying private and I feel sorry for people that have to fly any other way.”

I can already picture the multitude of offshoots after “Shahs” success.

We’ll have the “The Brahmins of Edison,” and the “Czars of Brighton Beach.” Miami could be the backdrop to either the Cuban “Barons of Brickell” or the Brazilian “Grandees of South Beach.”

The U.K.’s new budget has ignited all manner of class warfare. Retirees say it’s a gift to the rich at the expense of the poor. The wealthy say it’s another attack on success and job creators.

But one piece has gone largely unnoticed: the limit on philanthropic giving. The measure would cap the tax relief for wealthy givers at 25% of their annual income, or £50,000, whichever is higher. It takes effect next year.

It’s similar to the Obama proposal, which would limit charitable deductions for high earners to 28% for couples with incomes of $250,000 or more or individuals with income of $200,000. The White House says limiting itemized deductions would shrink the deficit by $584 billion over 10 years.

The U.K. expects its measure (along with caps on business deductions) to result in $490 million in saved revenue.

“Giving shouldn’t mean you pay no tax,” according to the U.K. Treasury.

Yet charities say the plan would put a chill on philanthropic giving just as the U.K. government is trying to create a new culture of giving.

The government has waged a massive PR campaign in the past two years to get the British wealthy move toward the American culture of philanthropy. Last year, Prime Minister David Cameron released the “Giving White Paper” which aimed to “renew Britain’s culture of philanthropy by working with charities and businesses to support new ways for people to contribute which fit into busy modern lives.”

It included millions in government support for charity groups, research and committees.

The new tax, say many charity groups, rolls back the efforts. The new limits will be especially damaging to people who make a one-time gift of more than half of their wealth to a foundation — which the wealthy often do for estate planning.

“People should not have to pay tax on money they have given away for the public benefit,” said Chris Lane of the Charity Tax Group, quoted in the Third Sector magazine.

The idea of “going Galt” has been a key argument for those opposing higher taxes on the rich.

Everett Collection

The wealthy, according to the argument, are just like everyone else when it comes to incentives. If you tax their income above a certain rate, they will stop working, stop creating jobs and stop creating wealth that gets spread around the economy. (The term “going Galt” comes from Ayn Rand’s hero in “Atlas Shrugged,” John Galt). Yet a new paper by Jeffrey Thompson at the University of Massachusetts Amherst Political Economy Research Institute says the “going Galt” argument doesn’t hold up to close research. According to the data, “affluent households are unlikely to make substantial changes in their ‘real’ economic behavior in response to modest tax increases.” Reviewing two earlier studies tracking American earners during the 1980s, Thompson finds that “high-income households did not alter their labor supply in response to large federal tax changes.” A second study showed that high-income doctors didn’t change their work hours at all in response to changes in state tax laws. The study concedes that if the wealthy had to pay a tax rate of 100%, they would work less. And it says that the reported income or “taxable income” of the wealthy does change in the face of tax changes: a fact often cited by Arthur Laffer and other conservatives. Yet Thompson says that these changes are the result of the wealthy managing their incomes through stock sales. When taxes are expected to go up, they sell more in advance to avoid them. The study says that “these households are pursuing tax avoidance strategies, rather than altering their real economic behavior.” Do you think the wealthy would change their work under the Obama plan?

Britain is not America, of course. But the country’s recent experiment with hiking taxes on the rich may have some lessons for the U.S.

To dig itself out of recession, Britain hiked its income-tax rate to 50% for those making £150,000 or more. Proponents said the tax was needed to bring fairness to an economy, in which the rich were getting richer and not contributing enough to the cause. Critics said the tax would chase out the job creators.

As it turned out, the real impact was in tax avoidance. According to the Chancellor of the Exchequer’s budget announced today, the income-tax hike caused “massive distortions” that cost the government.

A study found that £16 billion of income was deliberately shifted into the previous tax year. As a result, the tax raised only £1 billion – a third of the amount forecast.

“No Chancellor can justify a tax rate that damages our economy and raises next to nothing,” he said.

As a result, the new budget calls for reducing the tax to 45% after April 2013. To appease the tax-the-rich crowd, the government will impose a seven percent tax on purchases of mansions for more than £2 million.

Again, this doesn’t mean that we would see the same level of avoidance in the U.S. under the Obama plan. But Britain seems to provide support for arguments by Arthur Laffer and others that when you try to tax the rich above a certain rate, they will do all they can to avoid it.

America’s millionaire population is still growing – though not by much.

Sprectrem Group

Click image to enlarge

The number of millionaires in America grew by 200,000 in 2011, according to a new report from Chicago-based Spectrem Group.

That sounds like a lot — especially with so many Americans still losing jobs and homes. But it represents a growth rate of only 2% – much slower than the growth in 2009 and 2010.

According to Spectrem, there are now 8.6 million households in the U.S. with a total net worth (minus principal residence) of $1 million or more. The number of households worth $5 million or more and $25 million or more also remained fairly flat, with growth of less than 2%. There are now 1,078,000 households worth $5 million or more and about 107,000 people worth $25 million or more.

The number of millionaire-households is still well below the pre-crisis high, when there were 9.2 million worth $1 million or more. (Spectrem uses surveys of more than 2,500 families for its report).

George Walper, president of Spectrem Group, said the results show that weak financial markets and the slow recovery in real-estate (especially investment real-estate for the wealthy) held back growth.

“We’re still not back to pre-crisis levels,” he said. He added that while the optimism of millionaires is increasing, “these folks are still worried.”

The report also broke down today’s millionaires by occupation and former occupation if retired. Managers make up the largest group, with 17%, followed by educators (12%), corporate executives (7%), entrepreneur/business owners (6%) and attorneys and accounts.

Tamara Ecclestone, the serial handbag-buyer and heiress to part of the multibillion-dollar Formula 1 fortune, said in an interview with the The Mail on Sunday that she has always been a penny pincher. “I am a bit obsessive about it,” she said. “I turn the heating off at night and I turn the tap off when I’m brushing my teeth. Before mobile phones I used to call my parents from a phone box and reverse the charges. And I like to book airline tickets as far as possible in advance because it’s cheaper.” She said she got 20% off on her last car. “I love to get a deal. Who doesn’t love a bargain?” Of all the great PR lines by the wealthy, the “thrift” defense may be the most common. David Siegel, who built the largest new home in America, says he’s “frugal.” So does Mike Bloomberg, who has just two pairs of work shoes, and buys small cups of coffee, which surely outweigh the private jet and two townhouses on the billionaire “thrift balance sheet.” Yet just with the others, Ms. Ecclestone’s thrift defense stands in stark contrast to her real life. We know this, because of a recent documentary, which shows her parading around in her mansion, flying around in her jet, buying a million-dollar bathtub (made from Mexican crystal) and taking her five dogs to the doggie spa at Harrods. During one scene, she commissions an elevator to be built in her home for one of her Ferraris. Her collection of Hermes handbags is worth an estimated £500,000. (Tamara is not to be confused with her sister, Petra, who recently bought the $100 million mansion in California.) Her spending even came under attack by a member of the Australian parliament, who criticized taxpayer funding of the Melbourne F1 race – and thus, the Ecclestone family fortune. The parliament member said in the documentary that Ms. Ecclestone “sets out to prove that she isn’t a ‘pointless, quite spoilt, really stupid, vacuous empty human being’. Her attempt is not entirely successful.” Ecclestone’s dad, Formula 1 boss Bernie Ecclestone shot back: “Any money that my children have got, they didn’t steal,” he said. “I’d like him to say what he said to me face-to-face. He is a person of little if any consequence and we shouldn’t be bothered by him.”

In his 1999 book, “Luxury Fever,” Robert H. Frank (the Cornell economist, not yours truly) argued that the rich were driving America into debt. Soaring incomes and luxury consumption at the top, he argued, was inspiring non-rich Americans to try to keep up with the much richer Joneses. They were going into debt, mortgaging their lives, working brutal hours and devoting their precious times to material consumption rather than happiness. “The runaway spending at the top has been a virus,” he wrote, “one that’s spawned a luxury fever that, to one degree or another, has all of us in its grip.” A new paper by two economists at the University of Chicago Booth School of Business offers some new statistical evidence for the “trickle-down spending” theory. According to the paper, by Marianne Bertrand and Adair Morse, cited in this week’s Economist, rising consumption by rich households induces the non-rich to consume more. It finds that up to a quarter of the decline in the savings rate over the last three decades could be attributed to trickle-down consumption. The study also finds that households that are more exposed to spending by the rich report more “financial duress.” Even more surprising, it finds that politicians who represent areas of high inequality are more likely to vote for policies that increase credit – presumably to fuel the spending binges of its less-wealthy voters. More wealth in your town, for instance, might lead to more Porsche dealers, country clubs and Louis Vuitton stores, which induce the non-rich to become customers. Of course, there are other possible explanations for the correlations. Perhaps the non-rich are spending more because they’re optimistic about their financial future — not because they want to keep up with the Gateses. And maybe the higher spending by the non-rich creates rich people (reversing the cause and effect). It’s also difficult to pinpoint a single reason why certain households are spending more or saving less. Still, the data looks at several alternative explanations and finds that “middle and lower income households expose to higher consumption by the rich also appear to consume more ‘rich’ goods, maybe because they are exposed to a higher supply of those goods in their market.” Do you think “trickle down spending” is making Americans spend too much?

About The Wealth Report

The Wealth Report is a daily blog focused on the culture and economy of the wealthy. It is written by Robert Frank, a senior writer for the Wall Street Journal and author of the newly released book “THE HIGH-BETA RICH.”

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